To cut, or not to cut 50 basis points.
As the Federal Reserve's September meeting approaches, JP Morgan reiterates its call for a 50 basis point cut, scheduled for Wednesday at 2 PM ET. Following Nick Timiraos' article highlighting the Fed's predicament, market odds have shifted from 20-80 to a nearly even 50-50 split.
Former Fed members Dudley and Mester have publicly weighed in, with Mester open to a 50 basis point cut and Dudley explicitly supporting it. While the Fed is in a blackout period, market observers wonder if "friends and old family members" might be sending subtle messages on behalf of the Fed Chair.
The spread between the Fed funds rate and inflation rate supports a cut, and the Fed is aware of the lag effect from policy changes. Recent CPI and PPI data were unsurprising, but analysts predict a core PCE increase of 0.13-0.17% for the month by piecing together the clues from each, indicating lower inflation.
Political developments will be closely watched, but pundits anticipate a split on Capitol Hill, which could contain potential changes.
The shift has helped the stock market this week. The Nasdaq is now up 6.14% this week which wiped out the -5.77% decline last week. The gain is the largest since October 2023 when the index rose 6.61%. The S&P this week is up 4.20% which nearly equates to the decline of -4.25% last week. THe gain this week is also on track for the best in 2024 (and best since October 2023).
In the US debt market,
- The 2 year yield is down another -7.6 basis points this week after tumbling -27 basis points last week.
- The 10 year yield is down -6.8 basis points after falling -19.5 basis points last week.
